13th May 2015
Azad Zangana, senior European economist at Schroders reflects on the eurozone GDP figures and what they mean for investors…
The eurozone economies in aggregate grew by 0.4% in the first quarter of the year, accelerating from 0.3% growth in the fourth quarter of 2014. Activity is growing at its fastest pace since the first quarter of 2014 – a sign that the European recovery is finally gathering momentum.
Surprisingly, Germany was not the star performer in the first quarter. The German economy grew by 0.3%, compared to 0.7% in the previous quarter and against consensus expectations of 0.5% growth. While a full breakdown of German GDP figures is not yet available, the German statistics office suggested that domestic demand continued to grow at the start of the year. It stated that a slowdown in net trade, and in particular a strong rise in imports, was the main cause of the GDP slowdown. The pickup in imports is a welcome sign that Germany may be rebalancing its economy at long last, which should, in time, benefit the European economy more widely.
Meanwhile, France surprised on the upside, growing by 0.6% although the growth in the fourth quarter was revised away (to zero). Stronger household consumption along with a smaller contraction in investment helped offset a more negative contribution from net trade. However, most of the upside surprise in the French data was caused by a rise in inventories, which suggests that it will not be maintained in the coming quarters. Nevertheless, France should continue to grow at a reasonable pace over the rest of this year.
In Italy, the economy is finally out of recession as it grew by 0.3%. It is the first quarter of positive growth since the third quarter of 2013. Spain, which provided an early estimate recently of 0.9% growth, had its figures confirmed. Elsewhere, the Netherlands posted reasonable growth of 0.4%, while Austria grew by 0.1%.
Thanks to the self-induced political uncertainty about its future in the eurozone, Greece is back in recession, which of course is having a negative impact on its public finances. Even if a bailout for Greece is agreed in the coming months, it will be some time before corporates and investors return to business as usual – suggesting growth will remain sluggish for some time.
Overall, the eurozone economy remains fragile, but it has enjoyed a good start to 2015. Low inflation is helping to boost the purchasing power of households, while easier lending conditions are helping to support corporates that are seeking to invest. We forecast eurozone growth to continue at this modest pace, but with measures of spare capacity still suggesting plenty of excess slack, the European Central Bank should keep monetary policy ultra loose for some time.